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From Severance Pay to Self-Insurance: Effects of Severance Payments Savings Accounts in Colombia

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Author Info
Kugler, Adriana D. () (Universitat Pompeu Fabra, CEPR and IZA, Bonn)
Abstract

In 1990 Colombia replaced its traditional system of severance payments with a new system of severance payments savings accounts (SPSAs). Although severance payments often are justified on the grounds that they provide insurance against earnings loss, they also increase costs for employers and distort employment decisions. The impact of severance payments depends largely on how much of the costs to employers can be shifted to workers. The theoretical analysis in this paper shows that, in contrast to a traditional system of severance payments, the system of SPSAs facilitates the shifting of severance payments costs to workers in the form of lower wages. Empirical results using the Colombian National Household Surveys indicate that the introduction of SPSAs shifted around 80% of the total severance payments contributions to wages and had a positive effect on weekly hours. Results using the 1997 Colombian Living Standards Measurement Survey suggest that, although SPSAs in part replaced employer insurance with self-insurance, SPSAs continue to play a consumption smoothing role for the non-employed.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 434.

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Length: 42 pages
Date of creation: Feb 2002
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Handle: RePEc:iza:izadps:dp434

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Related research
Keywords: Distortions tax shifting unemployment insurance consumption smoothing crowding out

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Find related papers by JEL classification:
E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
H2 - Public Economics - - Taxation, Subsidies, and Revenue
J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
J6 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marcela Eslava & John Haltiwanger & Adriana Kugler & Maurice Kugler, 2004. "The Effect of Structural Reforms on Productivity and Profitability Enhancing Reallocation: Evidence from Colombia," NBER Working Papers 10367, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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